Just when you thought it was safe to pass on your life savings to the family members… die wealthy this year and save 10%.
As printed in the Atlanta Business Chronical
Affluent families and their advisers are eager for an end to the uncertainty surrounding the estate tax. Time is running out for the current tax, which expires at the end of the year. Signed into law by President George W. Bush in 2001, it exempts estate wealth under $3.5 million (or $7 million for married couples) and taxes inheritances above that amount at 45 percent. Congress must decide whether, and how, to renew the estate tax.
Without a renewal, the estate tax would be repealed for one year in 2010 and then return to pre-2001 levels that would be more unfavorable to wealthy families — a $1 million exemption and a 55 percent tax rate for estates over that amount. The legislative limbo has weighed heavy on affluent families and their planners.
“It’s definitely been a topic of frequent conversation with our high-net-worth clients,” said Jeffrey Call, shareholder and managing director of personal financial services at Bennett Thrasher P.C. “Some of our clients have put off planning because of the estate tax being in flux.” In previous years, there have been discussions about eliminating the tax, but this now seems highly unlikely, said Call, who specializes in wealth transfer and financial planning for high-net-worth individuals. Most industry insiders expect the law to be renewed at the current levels with possibly a few modifications. These changes could bring both opportunities and obstacles for estate planning. One of the most desirable potential changes would allow people to use the $3.5 million estate tax exemption while they were still alive, rather than waiting to give away assets after death. This would allow people to give away assets such as real estate and stocks that have low values now — rather than years later, after they have appreciated. “It would shelter that appreciation from the estate tax,” said Bo Wilkins, a partner at
Planners predict many clients would be interested in taking advantage of this. “That would be significant,” said Wesley French, a principal at the Atlanta-based investment advisory firmFrench Wolf & Farr Inc. “It would be a big driver of additional initiatives by our clients.” Grantor Retained Annuity Trust (GRAT). The GRAT allows someone who owns a business or stock in a business to transfer future appreciation to the next generation with a greatly reduced tax burden. The owner transfers assets into an irrevocable trust and collects a fixed annuity for a certain number of years. The term is typically set for a short duration, such as two years, because the person has to survive the length of the trust for the arrangement to work.
Another possible change, known as portability, would allow spouses to use each other’s $3.5 million exemption. For example, the spouse who dies first could transfer his or her $3.5 million exemption to the surviving spouse, who would receive a total exemption of $7 million. But not all of the proposals are favorable to families. Some would restrict the ability to transfer wealth to future generations.
Wealth advisers are concerned about possible changes to the law that would affect a popular tool known as the GRAT. However, some lawmakers have discussed creating a 10-year minimum term for a GRAT, which would make it much less attractive. This means the clock may be ticking for those interested in a GRAT. Regardless of what happens in Washington, advisers say there is no time like the present for estate planning. Many assets — such as stocks and real estate — have such low valuations, making it the perfect time to transfer them to the next generation with less of a tax burden.
“It’s a fabulous time to gift,” Wilkins said. The economic downturn has created opportunities in estate planning. “There has been a confluence of events over the past few years relative to interest rates and valuations that has made intra-family giving very attractive,” said Steve Parker, a wealth adviser and managing director of J.P. Morgan’s Atlanta office.
Advisers say real estate is ripe for gifting. A qualified personal residence trust, known as a QPRT, is a good strategy for removing the value of a home from an estate. These trusts significantly reduce tax burden by allowing owners to transfer the home’s title to their children but retain the right to live in or use the home over a certain period of time, such as 10 years. The home is taxed at a reduced rate when placed in the trust, and after the term of the trust, the home would be passed on to the children without any estate tax. “This is a particularly promising area right now, especially for vacation homes,” French said. “Values are depressed on real estate and second-home communities have been really impaired, so you have the ability to get an appraisal for a much lower amount.”
Meanwhile, families continue to focus on planning. Parker said the estate tax, regardless of possible changes, is so substantial, planning remains essential. And advisers expect 2010 to be especially busy.
“People just want clarity as to what it’s going to be,” Call said
